Default Technology: Investing For The Future
Default technology is an important investment to improve
workflows and compete with the larger banks and mortgage companies.
By Ron Morgan
It is a challenging time for the mortgage industry, which is coming
off of a vibrant economic period that featured record housing starts and
mortgage production levels. With mortgage rates projected to continue rising,
the industry is experiencing a lull of sorts in loan volume.
At the same time, the proliferation of mergers and acquisitions that are
taking place in the industry is shrinking the number of players. These changes
in the industry put a strain on loan servicing with the influx of large volumes of
portfolio transfers and merging of loans into new servicing platforms.
This lull in the industry provides a window of opportunity for mortgage
servicers to re-evaluate their technology and upgrade their systems. Those
with forethought will use this window of opportunity to their advantage by
putting default management technology into place that will take them to the
next plateau and allow them to gain a competitive advantage over other
servicers.
Loan servicers that upgrade their technology now will be positioned to
better handle the increased number of defaulted loans as a result of the increase
in interest rates. Unlike servicers who choose not to upgrade their technology,
those that do will not have to scramble to find additional untrained resources
and staff to handle the heavier workload when it arrives.
Investing in technology now will improve workflows and enable loan
servicers to compete with the bigger banks and mortgage companies in the
long run. Small to medium-sized mortgage companies, equipped with the best
technology, can continue to reduce credit losses while maintaining and
increasing profit margins. Often, these small and medium-sized servicers do
better than their larger counterparts that have more loans than they can
effectively handle.
Keeping this in mind, the question becomes: What can loan servicers do
to keep up with these turbulent times and how can they ensure that the default
management component of their servicing systems will fulfill their needs while
improving their profits?
Servicers will come out ahead by streamlining their default technology
systems and establishing connectivity to industry-related partners. By doing
this, they will maximize the consistency of payment streams across their
portfolio and improve the long-term performance of their default management
systems.
The value of streamlining
Subsequent to the completion of a strongly recommended business re-engineering initiative, streamlining operations will make loan servicers more
efficient and more profitable. Streamlining enables loan servicers to
dramatically reduce cost by eliminating outdated functions such as data entry
processing, manual entry of duplicate data, rounds of vendor phone calls and
numerous faxes. Time is money and streamlining will save companies money
by making their processes less time consuming.
When it comes to streamlining default management systems, electronic
connectivity is the key. Establishing electronic data interchange capabilities
with outside service providers, such as bankruptcy and foreclosure attorneys,
title companies, BPO, field service companies and government-sponsored
enterprises (GSEs), improves efficiency by providing more complete
information to these groups while eliminating the need to re-enter data,
reducing delivery costs to and from service providers, and increasing employee
productivity.
Workflow is improved on each loan because the integrated data that is
accessed from the servicing system is presented in the appropriate convertible
format to the outside service provider, ensuring that they are well versed when
they get the file to start the process.
Ideally, all service providers, including title companies, appraisers, BPO
providers, credit agencies, and field service inspections will be electronically
connected. This will eliminate all of the back-office logs, overnight packages,
letters and faxes that loan servicers are burdened with today, while having a
system that will track the performance of the service providers.
Once the data file is distributed to a foreclosure or bankruptcy attorney,
for example, a streamlined default management system can keep the file up to
date and moving forward in regards to the foreclosure, bankruptcy or workout
solution between the loan servicer and the attorney, as mandated by the GSEs.
Streamlining also enables outside service providers to update the file
themselves (adjust dates, codes or change status), rather than having to work
through the servicer with a letter or fax. By updating integrated default
technical solutions, servicers gain a constant monitoring and performance
evaluation of the service providers.
The issue of connectivity to GSEs and other outside service providers
warrants attention. To the extent that a servicer's default management system
incorporates GSE, private investor and mortgage insurance provider
requirements into the workout process, a fully automated system will produce
feasible payment options more quickly and the benefits related to that will
accrue to the servicer, thus positively impacting profit margins.
The connectivity issue need not apply only to GSEs and outside service
providers. Default management technology enables improved communication
between loan servicers and the borrowers themselves. This will improve the
relationship between servicer and borrower by enabling borrowers to play a
more direct role in the exploration of options that will effectively cure the
defaults. This communication with borrowers will unify direct users and the
consumers whose loans they service.
Efficient workflow
A streamlined workflow should handle close to 90% of the default
management processes. There will always be exceptions that must be handled
individually on the loan level, and the system must provide the ability to exit
both scripting routines and workflow automated paths, which will then provide
for manual intervention.
The goal of an automated default management system is to be event-
driven. The workflow should have the ability to assess an action and initialize
the correct subsequent activity. For example, the workflow should
automatically place a stop flag on a loan, issue an EDR code, produce a letter,
send a message, or order an appraisal without being instructed to do so.
What the workflow enables a user to do is simply fill in an initiation date,
for example, and from that, will generate letters, status, EDR reporting codes
to the GSEs and any other required processes. By automating the entire
process, it becomes more efficient and less vulnerable to human error. This is
a good example of utilizing "push" technology.
The value and the benefit of upgrading default management technology is
generated by increasing the services provided on the network and lowering
costs associated with doing so.
Ultimately, the benefits of a default management system are designed to
give servicers the tools needed to anticipate borrower problems and present
those borrowers with their best available workout options. A good default
management system is one that can communicate efficiently with outside
service providers and quickly initiate those options.
A good technology plan cannot succeed without a good business plan.
The existence of one is dependent upon the existence of the other. It is
important for the technology group and the business group within a mortgage
lending institution to work together to achieve their business objectives.
Business objectives cannot be met without supporting technologies. All of
these rules apply when selecting or upgrading an existing default management
system.
Ron Morgan is manager of business development in the mortgage
division of the London Bridge Group, an Atlanta-based provider of mortgage
software products for servicing and default management. He can be at
reached at (407) 805-8701, or via email at rmorgan@lbss.com.
This article was previously published in the March 2000 Issue of Servicing Management.
